Accruals Management to Avoid The Current Ratio Falling Below One: An Empirical Analysis Among Nonprofits

Abstract

This study examines the distribution of the current ratio among large Belgian nonprofit organizations (NPOs). A current ratio falling below one signals (potential) liquidity problems among different types of stakeholders. Consistent with managerial intervention to avoid the current ratio falling below one, we observe significantly more (fewer) observations meeting or just exceeding (falling below) the threshold of one than would normally be expected. This discontinuity around one disappears when considering the distribution of the “pre-managed” current ratio (i.e., the current ratio corrected for abnormal working capital accruals). The latter observation is consistent with managerial intervention in the financial reporting process to avoid the current ratio falling below one. The aforementioned findings are supported by a multivariate regression model revealing significantly higher abnormal working capital accruals for observations having a current ratio equaling or exceeding one, but a pre-managed current ratio falling below one.